7 CAPITAL MARKET TRENDS TO LOOK FORWARD TO IN 2015
We’ve come a long way since the Great Recession, with the capital markets showing strong vital signs so far in 2015. And Kimco is taking full advantage. The ample liquidity and mortgage financing available is giving individual owners, buyers, and regional players increased access to capital, enabling us to execute strategic sales of assets at an accelerated pace. In fact, in 2014 Kimco sold more than $1 billion of retail assets in secondary and tertiary markets.
We have also continued to refinance debt at increasingly lower rates. To give you an idea, in March 2014 we issued a seven-year bond at 3.2 percent all in. Today, we would be able to issue a 10-year bond under 3.5 percent. The increased liquidity in the marketplace even puts high-quality REITs like Kimco in a strong position to access the 30-year-term market. Kimco recently announced a 30-year-term public unsecured debt offering of $350 million notes due 2045 at a coupon of 4.25 percent annum with an effective yield of 4.313 percent. There have been a few 30-year deals done in the past, but by-in-large this hasn’t been a part of the bond market many REITs have been able to access.
For now, current market conditions have provided access for higher-quality REITs to the long-dated part of the bond market which has not always been available. Take advantage of it if you can while Treasury rates are at these low levels.
Here are seven trends we are watching in the capital markets this year, and how we think they will affect retail real estate in the coming months.
1. The corporate unsecured bond market is in incredible shape. Since the beginning of the year, corporate bond issuance totals $256.6 billion, highlighting the demand for corporate high-quality investment grade bonds and the enormous amount of liquidity that’s in the market. This is evidenced by some of the deals that have been done recently. For example, Actavis placed a $21 billion offering of senior unsecured notes, while Exxon solicited buyers for a $7 billion bond issue. The market is gobbling this paper up, with very little in terms of new issue concessions. We’ll continue to watch the unsecured bond market, which for now remains in terrific shape.
2. The commercial bank market is very strong with plenty of liquidity. By way of example, during January, Kimco refinanced a $400 million term loan and closed on a new $650 million unsecured term loan. We reduced our pricing from LIBOR plus 105 bps to LIBOR plus 95 bps and had over a $1.2 billion of commitments for a $650 million deal. Further evidence of this strength can be found through the stress tests that these banks have to pass. 28 of the major banks passed this stress test and as a result will soon be allowed to further increase their dividends to their shareholders. I mentioned, we’ve come a long way from the Great Recession, and the enormous amounts of capital available in the market today are a testament to that.
3. The CMBS market is on an upswing. In terms of the commercial mortgage-backed securities (CMBS) market, we’re seeing that the banks are lending again. There has been some loosening of requirements, leverage levels are starting to increase, and delinquency rates are down. As a result, some 70-75 percent loans are coming online again in the CMBS market. Good underwriting is still a requirement, but the requirements aren’t as strict as they were two to three years ago. All in all, the market is sound and open for business.
4. Equity markets are clearly open. As we look at where the markets are today, and the overall recovery of the real estate market itself, we see that ability to issue common equity is clearly an option, if needed. In February, Kimco established a $500 million at the market (ATM) continuous offering program, which enables the company to, from time to time, offer and sell shares of its common stock. Through this program, Kimco has an attractive alternative, low-cost source of capital, to help us better manage our balance sheet. It ensures that balance sheets are kept strong and can be used to help fund redevelopment and development projects, in addition to managing debt maturities.
5. Interest rates are making it a good time to be a borrower, for now. For all of these trends, interest rates are key. Looking back to the beginning of 2014, the 10-year interest rate was 3.04 percent. I don’t think there were too many people during 2014 who expected the 10-year rate to end as low as it did, moving closer to 2.2 percent and currently under 2 percent. Even with expectation of rising rates coming from the Fed, the 10-year rate is still sitting at under 2.0 percent, the 30-year Treasury is sitting at under 2.6 percent, and spreads have remained pretty steady. It is an advantageous time to be a borrower, and Kimco has used this to our advantage as we continue to strategically refinance debt at lower costs.
6. Sovereign capital is flooding into the U.S. Foreign capital is continuing to flow into the U.S. due to the strong dollar, with global investment volumes rising 11.5 percent in 2014. The recent purchase of the Waldorf-Astoria by Chinese insurance firm Anbang Insurance for $1.95 billion is a prime example of foreign investors snatching up top-tier properties. Other examples include Bahrain’s Investcorp purchasing $300 million in multifamily properties, and top-tier office properties being snapped up by Canadian, Norwegian, and Hong Kong companies.
7. Investment grade bond markets will see interest rates rise, but with minimal impact. In terms of predictions about the investment grade bond market, all signs point to the market performing well, with particularly strong demand for corporate bonds, as mentioned above. We do project rates will rise during the year, but not in a dramatic way at the long end of the curve. If the Fed does start to raise rates, there will be some lifting of LIBOR, which will impact those with floating rate debt. But for Kimco, we’re about 85/15 fixed, so there is minimal impact.
Overall, 2014’s capital markets were strong and today’s capital markets will continue to remain in excellent shape. It’s a great time to be a high-quality borrower, and Kimco will use it to our advantage for strategic acquisitions, redevelopments, and dispositions, and continue to drive down its cost of capital.